Officials burn through Pan Am Games reserve fund

Torontosun.com
June 20, 2015
By Shawn Jeffords

TO2015 burned through nearly half of a multimillion-dollar Pan Am Games reserve fund a year before the scheduled start of the event and had immediate plans to blow through the rest, documents obtained by the Toronto Sun show.

Experts determined a $12-million contingency fund wasn’t enough to address unforeseen expenses and they “indicated a need for a robust contingency reserve equal to 10-15% of the operating budget,” says a report obtained through a Freedom of Information request.

So an $82-million contingency fund - 15% of the games’ operating budget - was established in June 2012 at the urging of third-party auditors to help keep the games on solid financial footing.

But today there is only $10 million left in the fund intended to cover unforeseen expenses, revenue shortfalls, and post-games costs, TO2015’s latest financial report says.

Forensic accountant Charles Smedmor, who has written about the Pan Am Games budget, said it should concern Ontarians there is so little left in the reserve.

“A $10-million contingency, when the operating costs will be at least $1.2 billion and the capital costs will be another $1.2 billion when all the bills are in, is an infinitesimally small amount,” Smedmor said. “With a one-time project, what can go wrong will go wrong. You can expect the $10-million contingency can disappear with a single summer rainstorm.”

But games spokesman Teddy Katz said $10 million “is the amount that was recommended by third-party games experts.”

“Compared with other multi-sport games this ($82-million contingency fund) is at the high end of the contingency range,” he said in an e-mail to the Sun.

It may take Ontario’s auditor general to get to the bottom of spending on TO2015, the Progressive Conservative Pan Am Games critic says.

PC MPP Todd Smith said the documents obtained by the Sun speak to the need for a larger review of all the games expenses.

“I think ultimately it will take an auditor general’s report to get down to the exact expenses and cost of the Pan Am Games,” he said.

Leaving just $10 million in the fund is troubling, he added. If the games budget can’t cover any sudden expenses, Ontario, as the deficit guarantor, will have to pay.

“We know there are going to be unforeseen circumstances,” Smith said. “Obviously, there have been unforeseen circumstances this year. I’m certain there will be things that pop up during the Pan Am Games that have to be dealt with.”

“For me, and for Ontario taxpayers, I know it’s concerning that they’re blowing through money as fast as they can,” Smith said.

The documents were meant to brief then incoming Minister of Tourism, Sport and Culture Michael Coteau on the state of the games in the summer of 2014. The reports outline not only the dwindling reserve and its history, but also the financial pressures on the games.

The initial $38.8 million from the reserve was used to enter into contracts for technology, sport and venues, marketing, operation, events and ceremonies, and public affairs, the documents indicate.

The province approved spending $28.5 million from the fund in January 2014 and another $9.9 million in May 2014.

At that point, TO2015 staff had spent nearly half the reserve - $38.4 million - with a year to go before the games.

That left $43.6 million for “pre-games, games-time and post-games contingency requirements,” a May 23, 2014 report notes.

But a report penned on July 22, 2014 “assumes most of the approved $43.6 million remaining in the reserve is already used for business continuity pressures.”

Pan Am officials did not explain what those pressures were when asked by the Sun.

When TO2015 submitted its first business plan in July 2011, it was reviewed by third-party experts for the provincial and federal governments who wanted to see an increase in the contingency fund.

In April 2012, $82 million was approved for the fund by TO2015’s board. That was achieved by cutting other areas of the games operating budget, which stood at $685 million in September 2012. It has since grown to $770 million.

But another federal and provincial review by third-party consultants in July 2013 raised red flags about unanticipated expenses, warning of other “financial pressures and risks.”

A Deloitte review also “identified $130-million of potential risks ... or $48-million more than what could be covered by its original $82-million contingency reserve.” The audit firm “recommended that a total of $23.5-million be reserved for use after January 2015 with $10-million available for post-Games costs,” the report said.

In September 2014 the province gave TO2015 an additional $74 million in funding, a decision Coteau described at the time as being “difficult.”

Organizers of the games went back to the Ontario government to ask for the cash to cover added costs such as staffing “where there are anticipated shortfalls in volunteer expertise” and security for spot and IT equipment in venues, and to cover an anticipated shortfall in revenues of $25 million.

Smith said part of the frustration surrounding the games for the opposition, media and members of the public is the difficulty in tracking spending.

“If transparency was a Pan Am sport, these guys wouldn’t get a medal, they’d get disqualified,” Smith said. “They’re not providing the information that they should be providing to the public who ultimately pay for these games.”

Smith noted the province will bear any deficit costs from the games as sole guarantors, meaning Ontario’s taxpayers will foot the final bill.

“The one thing we can say about the provincial government is they’re not afraid to go into debt,” he said.

“They’re not afraid to run deficits. Running a balanced budget isn’t exactly their forte.

“It’s not surprising to me that they’d be willing to accept any overruns on these games because that’s just the way they operate.”

The internal reports from the summer of 2014 obtained by the Toronto Sun also raise red flags about potential financial “risks and pressures” including fear of revenue shortfalls and poor volunteer recruitment.

“TO2015’s sponsorship revenue target is ambitious,” the report says. “It remains unclear whether TO2015 will be able to achieve its target of $102 milllion.”

In a third version of the budget, a revenue shortfall of $26.8 million is projected, mainly due to a $21.3-million shortfall in sponsorships. The document again concedes that the $102-million sponsorship target is “aggressive.”

The reports also raise concerns about the number of volunteers needed to staff the Games.

“TO2015’s business model heavily relies on 20,000 volunteers,” it said. “Number of applications received to date have been below TO2015’s expectations. Vacancies may need to be filled with paid staff.”

The games budget’s early iterations make clear the $113-million security budget will not be sufficient and will have to be bumped to $239 million. The report also contemplates uploading security costs the Ministry of Community Safety and Correctional Services from the Pan Am operating budget.

Pan Am is expected to release a final financial report in January 2016.

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THE DWINDLING TO2015 CONTINGENCY FUND:

June 2012: $82.5-million contingency fund established
January 2014: $28.5 million spent
May 2014: $9.9 million spent
July 2014: $43.6 million remaining in the reserve is already used for business continuity, report says.
September 2014: $10 million in contingency fund, Ontario auditor general reported
Where did the original Pan Am Games money come from?

Games budget (operating and capital) - $1.4 billion
Federal government - $500 million
Provincial government - $500 million
Municipalities/Universities - $288 million
Revenue - $153 million (in projected revenue)
Pan Am’s Operating Budget - $770 million - includes:

Sport and venue management - $152 million
Revenue, marketing and ceremonies - $157 million
Games Services - $123 million
Corporate - $76 million
Technology - $77 million
Admin Services - $44 million
Contingency - $10 million
Essential Services (includes some security and games legacy costs) - $131 million
- Total capital budget - $672 million

Pan Am expenses outside of the games budget

Security - estimated at $239 million, but could increase.
Athletes’ Village - $709 million